5 Red Flags of credit cards that you should avoid

5 Red Flags of credit cards that you should avoid Knowing these credit card warning signs can help you rule out bad deals and save money. Ch...

5 Red Flags of credit cards that you should avoid5 Red Flags of credit cards that you should avoid

Knowing these credit card warning signs can help you rule out bad deals and save money.

Choosing the right credit card can be difficult, especially if you have a bad credit score (credit bureau) or have never used a credit card.

There are many cards that can help those with limited options, but some options -- including some unsecured credit cards -- are more expensive and potentially more dangerous than others. These “subprime specialist” cards, as they are often called, may be easier to obtain, but they often come with high-interest rates and unnecessary fees that make them quite expensive.

To keep the right card in your wallet, you should avoid these offers. Here are five warning signs to watch out for.

1. Excessive commissions

Although an annual fee for a credit card is not ideal, it does not necessarily have to be excessive. In fact, if you have a poor or low credit score or are unbanked, an annuity card may be the best and only option for you. Annual fees can also be helpful if the card offers ongoing rewards, benefits, or other incentives to offset them.

However, the annual cost of a card should not be excessively highMany good credit cards for people with poor credit offer a relatively low and manageable annual fee, often $50 or less.

But annual fees aren't the only cost you may incur. Many so-called savings cards include fees that can surprise unsuspecting consumers. Some examples are application fees, activation and processing fees, and maintenance or monthly membership fees. These fees are often unnecessary and avoidable, but they are common with some unsecured credit cards—cards that don't require a deposit as collateral.

Before choosing a card, read the terms and conditions to find out what fees you may incur.

2. Exorbitant interest rates

Unless you carry a balance every month, the interest rate on a credit card is irrelevant because you never have to pay interest. However, financial emergencies and other factors can force you into debt, which is convenient but also expensive.

In May 2021, the average APR for interest-bearing cards was 16.30%, according to the United States Federal Reserve. The interest rate they charge you depends on your credit score, which indicates to the card issuer the risk it assumes when it grants you credit.

In general, the lower your credit score, the higher the interestHowever, some credit cards for people with bad credit carry impressive interest rates, sometimes as high as 30% or more.

Credit cards that offer low or favorable interest rates typically require a good credit score, but there are other options that can make carrying a balance less expensive:

Secured credit cards require a refundable deposit, which serves as a line of credit and collateral. They may be easier to obtain because the bank takes less risk. Secured cards, especially those that also have annual fees, sometimes have a lower interest rate.

Depending on your credit history, you may be eligible for a credit union card that offers lower interest rates than big bank products. However, to obtain such a card, you must join a credit union, and there may be restrictions on membership.

3. Low credit limits

Some beginner credit cards or unsecured credit cards for low credit advertise a certain credit limitThe limit you qualify for depends on your credit score, but it's important to understand how a low credit limit can hurt you.

If your card has an annuity, you will often need to subtract this amount to determine your current credit limit. For example, if you are approved for a $300 line of credit on a card with a $50 annual fee, your original line of credit is actually $250 until you pay the fee. Basically, you are in debt immediately and have lost about 17% of your credit limit before you even use the card for the first time.

A low credit limit can also affect your credit utilization ratio, which is an important factor in your credit score. Credit utilization is the amount you owe relative to your available credit. So, if you have a credit limit of $1,000 and a balance of $500 on your card, your credit utilization is 50%.

Generally, it is recommended to keep credit utilization below 30%. But generally, the lower this percentage, the better it is for your credit score.

And if you earn rewards on the card, a low spending limit also means a low limit on the rewards you can earn.

Tip: Some credit cards advertise the possibility of increasing the credit limit if the card is used responsibly.

4. Partial credit information

To build credit, the ideal is a card that reports to the main credit information agencies in your country. These credit bureaus compile the credit reports that form the basis of your credit score.

Cards with incomplete credit reports can be problematic because you don't necessarily know which bureau a potential lender will pull your credit report from.

For example, if a lender pulls reports from a credit reporting agency but your card only reports with other credit cards, the lender may not be able to identify your credit activity.

5. No possibility to increase credit

Responsible use of your secured or initial card can increase your credit score. At that point, you may want to switch to a credit card with better terms, higher rewards, or more generous benefits. For this, it is beneficial that your current card facilitates this process.

The best credit cards for people with bad credit - mainly secured cards - often offer upgrade options, either automatically (with responsible card use) or upon request.

This means you can qualify for a better card within the issuer's family of products without having to close your current account. And if your account is still in good standing at the time of the upgrade, your deposit will be returned to you.

Cards that don't offer the upgrade option can still be useful. However, in the long run, you are stuck with a product that is too small for you, which can be especially expensive if you pay an annual fee.

You can cancel the card immediately, but this can have a negative impact on your credit score.

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